4 May 1990 Income Tax Severed Letter AC74844 - Investment Tax Credit for Qualified Exploration Expenditures - Review of Form T2038(Ind)

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

May 4, 1990

FROM - Technical Publication Division Technical Review Section Esta Mikhail 952-3606

TO - Returns Processing Division Individual Assessing Section N. Kelly

Attention: Joyce Tom

SUBJECT: Review of Form T2038(IND)

We have reviewed form T2038. Our review was based on the provisions of the Income Tax Act. We know of no proposed amendments affecting this form.

Our comments on technical accuracy are presented below and include suggestions of a non-technical nature to simplify the contents of this form for the benefit of the end-user. A mock-up of form T2038 is included and the comments below are cross-referenced to the mock-up copy. Since form T2038 to be used by corporations and form T2038 to be used by individuals are based essentially on the same provisions of the Income Tax Act, we have tried to highlight the areas where the two forms could be streamlined so that both forms would provide the same comments on the same subject. Our comments are as follows:

1. Presumably this form is to be used for 1990 and subsequent taxation years rather than 1984 and subsequent taxation years as presently indicated on the form. Could this be clarified?

2. Since ITCs earned before April 20, 1983 cannot be carried forward to 1990, could this be deleted? The ten year carry forward and three year carry-back rule in respect of qualified Canadian exploration expenditures only applies to such credits earned after November 30, 1985. (127(9) "investment tax credit" paragraph (c)(ii)). Could this be added for clarification?

3. Could the following be added to 3(A) "Complete and file form T661 for an R & D claim" to be consistent with the comments on T2038 for use by corporations. The reference to form T661 in 3(B) and 3(C) on the second page could then be deleted.

4. There are numerous technical deficiencies in paragraphs 1 and 2. Could consideration be given to using wording similar to that used on form T2038 (Corp.) presented under the heading "Supplementary Information"?

5. It seems to us the specified percentages to be shown here are those that are relevant for computing investment tax credits earned during 1990 and subsequent years. The consequence of this is that all specified percentages that no longer apply to 1990 can be deleted. We have indicated on the mock-up copy the ones that can be deleted.

6. We would suggest that the words "cannot be claimed by a specified member" be deleted for the reasons commented on in 9 below.

7. We would suggest that the words, "cannot be claimed by a partnership" be deleted and the following be added "include amounts reported to you on form T102 supplementary". Qualified Canadian exploration expenditures incurred by a partnership flow through to partners and are reported to partners on form T102 supplementary.

8. For the reasons commented on under 5 above, we would suggest that the appropriate codes be deleted.

9. In 1986 substantial tax changes were enacted limiting the amount of investment tax credits that may flow through from a partnership to a "specified member" or a "limited partner". These changes appear not to have been taken into account in the present revisions of this form. In addition, section 229 of the Regulations was enacted recently requiring the filing of a partnership information return on which, among other things, the amount of investment tax credits allocated to partners needs to be reported. Certain partnerships are exempted from filing.

In light of the above we would suggest that the following instruction be added to the asterisk for completing box (3):

"...add the amount of investment tax credits allocated to you from a partnership. Enter the amounts reported to you on form T5013 supplementary, if you received that form".

Please note that investment tax credits earned by a partnership cannot be claimed by the partnership because the partnership is not a person and are allocated to partners ordinarily on form T5013 supplementary under subsection 127(8) of the Act. The determination of the amount of investment tax credits earned that can be allocated to a partner depends on the type of investment tax credit and on the type of partner (for example "specified member" as defined, in 248(1) or "limited partner" as defined in 96(2.4)) and is made at the partnership level. What is important to note is that investment tax credits earned by a partnership reduce the depreciable property under 127(12) or the R & D pool under section 37 by virtue of subsection 127(12.1) at the partnership level and not at the partner's level. Further, it is the amount of investment tax credits allocated to partners, and not the investment tax credit deducted by partners, that is the amount used for a reduction. This is the reason why investment tax credits allocated to a partner should not be included in the "Calculation of ITC - Current Taxation Year" on form T2038 but should be dealt with separately in column 3. Accordingly, we would suggest that the caption reading "Note: A taxpayer who is a member of a partnership should include his/her portion of the partnership investment or expenditure" be deleted.

You may want to check with Returns Processing how the investment tax credit allocation from a partnership is to be dealt with in the revision of form T5013 supplementary for 1990. The present format of form T5013 supplementary does not reflect properly the requirements of the law either. The instructions given on form T2038 should be aligned with instructions used for the preparation of form T5013 supplementary.

10. Could it be clarified which line on Schedule 1 of the T1 return or on page 4 of the T1 return provides the input for line "y"?

11. Could consideration be given to using a layout for page 3 that is similar to the layout used for corporations? Rather than having sections 1 and 2, you may want to consider using Box A for calculating investment tax credits earned during the year, Box B for updating the cumulative account balance for investment tax credits at the end of the year, Box C for calculating the investment tax credit to be deducted from tax otherwise payable under subsection 127(5), etc.

12. Presumably the amount calculated under "D" is the deduction allowed under paragraph 127(5)(c). It appears that subparagraph 127(5)(c)(ii) requires the addition of Part I.1 surtax here. Could this be looked into?

13. Could consideration be given using the same format as is used for corporations?

Could a reference to subsection 152(6) be added here to indicate the authority in the Act for requesting a carry-back.

14. Could a reference to subsection 127.1(2) be added here to disclose the authority in the Act?

Certain trusts described in subparagraph (a)(iii) of the definition "refundable investment tax credit" in subsection 127.1(2) can also use this form. Could this perhaps be added?

15. Could this paragraph be reworded "The ITC may be carried back only to the extent that the credit was not deductible in the year in which it was earned" to be consistent with the T2038 (Corp.)?

If you have any questions, please feel free to call Ms Esta Mikhail.

ILLEGIBLE SIGNATURE for Chief Technical Review Section Technical Publications Division Legislative Affairs Directorate

EM/hm(29-31.1) COR "B"

Enclosure